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Raymond James: Synnex, Arrow Most Likely Candidates to Buy Westcon-Comstor

Distribution rivals Synnex and Arrow Electronics would benefit both technologically and financially from purchasing $4.9B Westcon-Comstor, according to financial services firm Raymond James.

Distribution rivals Synnex and Arrow Electronics would be the best fits for purchasing $4.9 billion Westcon-Comstor, according to Raymond James.

The St. Petersburg, Fl.-based financial services company cited numerous technological and financial benefits for Fremont, Calif.-based Synnex or Centennial, Colo.-based Arrow pulling the trigger on a Westcon-Comstor acquisition. Weston-Comstor parent company Datatec Ltd. announced Friday that it's in talks to sell a major share of the struggling Tarrytown, N.Y.-based firm for more than $800 million.

Datatec announced in January that it was negotiating a material transaction, with sources telling CRN at the time that the most likely outcome was the sale of Westcon-Comstor. A couple of days later, Raymond James put out an industry brief examining which potential buyer would make the most sense. The report was written by Raymond James analysts Brian G. Alexander, director of equity research and Adam Tindle, IT supply chain analyst.

[RELATED: Datatec Is In Talks To Sell Major Share of Westcon-Comstor For More Than $800 Million, SAP Snafu Blamed For Earnings Drop]

Purchasing Westcon-Comstor would be a win-win-win for Synnex, Raymond James said, boosting gross profit margins, filling the Cisco void in its line card, and expanding its presence beyond North America and Japan. Synnex is the only North American broadline distributor not carrying Cisco, while 44 percent or $2.16 billion - of Westcon's sales come from its Cisco-exclusive Comstor business.

More than half of Westcon-Comstor's sales come from geographies where Synnex doesn't do business today, with 33 percent – or $1.62 billion – of the distributor's revenue coming from Europe, and 10 percent – or $490 million – of sales coming from each Latin America and Africa and the Middle East. Synnex is the only North American publicly-traded distributor that doesn't do any business in Europe.

For Arrow, buying Westcon-Comstor would immediately give the distributor a larger security footprint, which Raymond James said is a key focus for Arrow's computing business. Westcon-Comstor generated more than $1 billion – or 34 percent – of its overall revenue from selling security products from vendors like Palo Alto, Check Point, F5, Blue Coat (now Symantec) and Cisco, according to Raymond James.

The deal would also give Arrow an IT presence in Asia, better positioning them to compete against value distribution rival Tech Data (formerly Avnet) Technology Solutions. Westcon-Comstor generated 10 percent - or roughly $490 million - of its revenue in the year ended Feb. 28, 2016, from Asia-Pacific; Technology Solutions, meanwhile, had sales in Asia of $1.17 billion for the year ending July 2.

Arrow's global presence would also make it easier for the distributor to find meaningful cost synergies across North America and Europe, Raymond James said. However, Westcon-Comstor's current gross margins of 11 percent are below Arrow's gross margins of 13 percent, according to Raymond James, meaning that Arrow would need to take costs out to make the acquisition profitable.

One industry source who closely follows the distribution market said that they expect significant layoffs at Westcon-Comstor in the wake of any acquisition.

"Not all the employees will survive the acquisition, but those that do will be working for an enhanced business with a steadier and more stable hand with more opportunity going forward," the source said.

The source said all three North American broadline distributors - Ingram Micro, Tech Data and Synnex - would benefit from acquiring Westcon.

"It's an SG&A (Sales, General and Administrative) take out play," the source said. "This is a deal that will significantly increase profitability and shareholder value for any of the distributors that acquire the business. My expectation is that the market will respond favorably to whoever buys the company just as it has to news that Datatec is selling the business."

Datatec's stock closed Friday up 7.1 percent to $4.11 per share. Raymond James said Westcon's net debt of $249 million would likely rule out Tech Data as an acquirer since the Clearwater, Fl.-based distributor's net debt is already more than triple its earnings before interest, taxation, depreciation and amortization (EBITDA) following its $2.6 billion acquisition of Avnet Technology Solutions in February.

However, an unconventional buyer like Chinese conglomerate HNA Group – which purchased Ingram Micro for $6 billion in December – is always a possibility, Raymond James said.

Meanwhile, a transaction the size of acquiring a major share of Westcon-Comstor is likely too large for Greenville, S.C.-based ScanSource, according to Raymond James, which has an enterprise value of just $1.2 billion. Enterprise value is used as a more comprehensive alternative to market capitalization to measure a company's total value.

Arrow, Ingram Micro and Tech Data all declined to comment for this story, while Westcon, Synnex, ScanSource and Harrisburg, Penn.-based D&H Distributing didn't immediately respond to requests for comment.

Datatec also revealed Friday that Westcon-Comstor was responsible for a more than 50 percent decline in the $6.5 billion IT conglomerate's earnings per share results for its most recent fiscal year, which ended Feb. 28. The earnings decline stemmed from disruption during the final stages of an SAP implementation in Westcon-Comstor's Europe, Middle East and Africa region.

Westcon-Comstor has reportedly made adjustments to its operating model, which Datatec expects will result in a rapid recovery. The results for $1.5 billion solution provider Logicalis, also owned by Datatec, were in line with management's expectations.

The industry source with knowledge of the distribution market said the deal will allow Datatec to focus squarely on funding the expansion of Logicalis, No. 30 on the CRN Solution Provider 500. Logicalis last month announced the creation of a South African business group based in Cape Town.

"A Westcon-Comstor deal allows Datatec to focus on Logicalis - a cash constrained business with good leadership," said the source.

Steve Burke contributed to this report.

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